Baroness Verma: My Lords, I am grateful for the opportunity to debate this report this afternoon. As chair of the EU External Affairs Sub-Committee,   I extend my thanks to the members of the committee for their important contribution to the report and take this opportunity to thank the secretariat to the committee, Eva George, Juliet Ewert and Lauren Harvey, for their assistance with the inquiry and the preparation of the report. I also thank our specialist adviser, Holger Hestermeyer, for his contribution and insight.
It is usual in such debates for speakers to reflect on the Government’s response to the report in question, so I take this opportunity to express my deep disappointment and genuine concern that no response has yet been provided by the Government, four months after the report was published. While the past few months have certainly been eventful, and I know that my noble friend has not been in her current role for long, there is still no justification for such a long delay. Just as it is the role of Select Committees to scrutinise and hold the Government to account, it is the Government’s responsibility to reflect on and engage with committees on their findings. I look forward to hearing from my noble friend in her response. I know that she will take our concerns about a timely response very seriously, and will press for a timely response to reports of this House’s expert committees.
Goods make up the bulk of the UK’s trade. In 2015, they accounted for about 60% of all UK exports to the EU and almost 77% of our total imports from the EU. Trade in goods between the two is worth almost £357 billion each year, so minimising disruption resulting from Brexit will be crucial to the UK’s prosperity.
We should also keep in mind that the manufacturing and primary commodities sectors are significant  employers across the UK, being particularly important to the Midlands, Wales, north-east Yorkshire and the  Humber, and the north-west. The goods sector also supports jobs in the services industry—from retailing to maintenance and servicing. The Government must secure a trade arrangement with the EU which recognises this interlinkage and secures suitable terms for both goods and services. In this regard, I commend the findings of the EU Committee’s report Brexit: Trade in Non-financial Services, prepared by the Internal Market Sub-Committee in parallel to our report on goods.
Our inquiry considered six large and economically significant sectors—the pharmaceuticals and chemicals industries, capital goods and machinery, food and beverages, oil and petroleum, automotive, and aerospace and defence—and the potential impact of changes to the conditions under which the sectors trade with the EU.
We began from the starting point that the Government are seeking to agree a free trade agreement with the EU after Brexit, as set out in the Prime Minister’s speech at Lancaster House. If agreed and implemented by May 2019, a free trade agreement could avoid the much talked-of cliff edge of moving to trade under WTO rules. Looking at it initially, trade in goods appears to be quite straightforward as part of the negotiations. Tariffs that would be levied in the absence of a preferential trade arrangement were of concern to all sectors we considered. They would be particularly significant in certain sectors, such as food and beverages. As many businesses are part of complex EU supply  chains, there is a risk that tariffs would be levied more than once as parts move between the UK and the EU 27, rendering even relatively low tariffs a significant new cost to firms. But that is the easiest part—tariffs could conceivably be addressed in a very comprehensive free trade agreement between the UK and the EU.
That brings us to one of the major concerns that the manufacturing sector has—that it does not need to be shielded only from new tariff barriers; we have found that non-tariff barriers, such as labelling requirements, rules of origin, sanitary measures and pre-shipment inspections, can pose significant or even greater barriers to trade. Rules of origin, which determine where a product and its components are produced, would apply under WTO rules or a free trade agreement, which could impose significant administrative burdens on companies. Some UK companies, often reliant on EU supply chains, may well be unable to comply with local content requirements. That is a particular concern for the important automotive industry. Can the Minister inform the House what actions the Government plan to take to protect UK-EU trade from the impact of the imposition of rules of origin? Maintaining common or closely aligned regulatory standards is also very important. Could the Minister comment on whether the Government are willing to make a legal commitment to maintain a high level of regulatory alignment with the EU 27 in the longer term, to safeguard our valuable trade relationship?
There is no doubt that the UK has benefited from participation in a number of EU agencies. We considered the European Medicines Agency and the European Aviation Safety Agency—participation highly valued by the pharmaceutical and aviation industries respectively. Could the Minister comment on how the Government intend to engage with those bodies after Brexit?
Exiting the EU’s customs union will also result in the introduction of a customs border between the UK and the EU 27. We were concerned that this would lead to significant administrative costs for businesses and the state. Just last week, the National Audit Office warned that the UK’s new customs declarations service, the CDS, may not be fully functional by the time we leave the EU. This was an issue that we highlighted in the report. I was very concerned to see from the NAO’s report that no changes have yet been made to the scope of the CDS programme in relation to our exit from the EU. Could the Minister comment on the resourcing of HMRC to manage the administration of customs processes between the UK and the EU and progress with CDS?
When we published this report, we were concerned that it would not be possible for the Government to resolve these many complex, thorny and critical issues in time for implementation in May 2019. We noted in March that uncertainty was already having a damaging effect on business confidence. At the start of this month, the manufacturers’ organisation, EEF, which gave evidence to our inquiry, warned that UK businesses would reach a tipping point next year over whether to continue to invest and manufacture in the UK.
That brings me to an essential conclusion of our report, and a common theme of the EU Committee’s many reports on Brexit—namely, the vital importance  of putting in place a transitional arrangement. To date, the Government have maintained that agreeing and implementing a new trade arrangement with the EU will be possible within the period of Article 50. It has been said that an implementation period will therefore be needed, but transitional arrangements to bridge the gap between leaving and the implementation of a new trade arrangement will not. In his appearance before the EU Committee last week, the Secretary of State for Exiting the European Union again said that “transition arrangements” was shorthand for an implementation phase. Our concern is that it may not be possible to agree a new trade agreement before we leave, necessitating provisions to bridge the gap between membership of the EU and our new relationship. I invite the Minister to state, for the record, whether the Government are now willing to consider a separate transitional agreement, such as ongoing membership of the customs union or an EEA-type arrangement for the immediate period after Brexit.
Transitional arrangements are an issue for our trade not only with the EU. Through our membership, we also have trade agreements with countries from Switzerland and Norway to South Korea and Egypt which are of considerable value to the UK. It has just been agreed that the EU-Canada free trade agreement will provisionally be applied from 21 September, and negotiations with Japan are coming to a close. It is therefore critical that the Government make every effort to secure the UK’s access to existing preferential arrangements for a transitional period until such time as we can negotiate new bilateral arrangements.
I know that the Minister will say that the Government are already speaking informally to a number of countries, but this debate can hardly be more important or timely, as negotiations begin in earnest to determine our future relationship with significant trade partners. How is the Government’s engagement with businesses across the country going? In response to their concerns, will the Government seriously seek, as a matter of urgency, transitional arrangements to protect our vital trade with the EU 27 and beyond? Finally, can we be reassured that both resources and expertise are sufficiently available to support us all through what we know will be challenging and uncharted waters?